European stocks rally on bad news that's not as bad as expected

When the news has been so grim and the speculation so dire, all it takes is news that isn’t as bad as expected to send stocks up.

That’s what has sent European stocks rallying today. At the close of trading today the German DAX Index was up 2.9%%, the French CAC Index up 1.8%, and the Spanish IBEX 35 Index up 2.6%.

The good—make that--“less bad news? The Ifo Institute index of current business climate in Germany fell to 107.5 in September from 108.7 in August. That was better than the drop to 106.5 that economists had been forecasting.

The Ifo survey of forward-looking expectations continued to show that the 7,000 executives interviewed for the study expect economic conditions to worsen as Germany heads into the fourth quarter. The index of forward-looking expectations fell to 98 in September from 100.1 in August. But that was still well above the consensus forecast from economists of 97.3.

With the Ifo survey signaling that a bad situation wasn’t as bad as expected, positive speculation managed to seep into the market. One speculation is that European leaders are about to increase the size of the European Financial Stability Facility, the body that will—the odds say—get new powers to prop up the market for troubled sovereign debt sometime late this year, to 2 trillion, wait, maybe 3 trillion euros, from its current 600 billion euro level. (After the European markets closed German Finance Minister Wolfgang Schaeuble said that EuroZone leaders had no intention of increasing the size of the Stability Facility.) Another speculation has the European Central Bank buying more Italian and Spanish bonds.

And, of course, there’s speculation that the European Central Bank will cut its benchmark interest rate by either 0.25 or even 0.5 percentage points from the 1.50% when it meets on October 6.